Triple Exponential Moving Average (TEMA)
When it comes to technical analysis, moving averages are one of the most commonly used tools by traders to identify trends in the market. A moving average, as the name suggests, is an average of a specified number of prices over a given period of time, and it is plotted on a stock chart to help traders visualize the trend. There are different types of moving averages, and one of the more popular ones is the Triple Exponential Moving Average, or TEMA.
What is TEMA?
TEMA is a type of moving average that is calculated based on the price of an asset over a specified period of time. What makes TEMA different from other types of moving averages is that it is a triple average, meaning that it is calculated using three separate calculations of exponential moving averages (EMA).
EMA is a type of moving average that gives more weight to more recent price data, and less weight to older price data. The formula for calculating EMA is:
EMA = (Current Price x K) + (EMA Yesterday x (1-K))
Where:
- EMA = Exponential Moving Average
- Current Price = The price of the asset at the current time period
- K = Exponential smoothing factor (2 / (n+1))
- EMA Yesterday = The EMA of the asset at the previous time period
- n = The specified time period, e.g. 10 days, 20 days, etc.
In TEMA, the formula for calculating the first EMA is the same as that of a regular EMA. The second EMA is calculated based on the first EMA, and the third EMA is calculated based on the second EMA, as follows:
EMA1 = EMA(Current Price, n)
EMA2 = EMA(EMA1, n)
EMA3 = EMA(EMA2, n)
Once all three EMAs have been calculated, they are combined to form the TEMA, using the following formula:
TEMA = 3 * EMA1 - 3 * EMA2 + EMA3
How to use TEMA in trading
TEMA can be used by traders to identify trends in the market, just like any other moving average. The difference is that TEMA is more responsive to changes in price, because it is calculated using three exponential moving averages instead of just one.
When the TEMA is rising, it indicates that the trend is bullish, and when it is falling, it indicates that the trend is bearish. Traders can use TEMA to identify support and resistance levels, and to generate buy and sell signals.
For example, when the TEMA crosses above the price, it is a buy signal, and when it crosses below the price, it is a sell signal. Traders can also use TEMA in conjunction with other technical indicators, such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD), to confirm their trading decisions.
Conclusion
TEMA is a powerful technical indicator that can help traders identify trends in the market and generate buy and sell signals. While it may seem complex at first glance, the formula for calculating TEMA is actually quite simple. By using TEMA in conjunction with other technical indicators and fundamental analysis, traders can get a better understanding of the market and make more informed trading decisions.